How Aave’s Proposed Fee Switch Incentivizes Long-Term Holding

Aave governance token (AAVE) holders might soon share in the platform’s profits through a proposed “fee switch” mechanism.

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  • Aave DAO have considered distributing Aave’s net profits to AAVE token stakers.
  • Aave DAO have debated stricter requirements for users borrowing against Dai.
  • Decentralized exchange Uniswap has been on track to implement its own fee switch proposal.

Holders of the Aave governance token (AAVE) may soon be entitled to a share of the platform’s profits. This comes as the Aave DAO, the decentralized autonomous organization overseeing the popular lending protocol, considers activating a “fee switch” mechanism.

Aave Explores Sharing Profits with Token Holders

The proposal, floated by Aave Chan Initiative founder Marc Zeller, suggests distributing Aave’s net profits, estimated at $60 million annually, to AAVE token stakers. This move could incentivize long-term token holding and bolster platform governance.

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Aave operates as a decentralized lending marketplace where users can borrow and lend cryptocurrencies. Borrowers deposit collateral to secure loans in other digital currencies. The platform is governed by AAVE token holders, who collectively vote on proposals through the Aave DAO.

Zeller’s proposition follows earlier hints of potential fee distribution for stakers. In March, he suggested a “new iteration of the safety module” to channel fees to AAVE holders. A “fee switch” typically allows for the activation or deactivation of fees within a DeFi protocol. In this case, activating the switch would enable Aave DAO to distribute a portion of transaction and activity fees to AAVE stakers.

This development coincides with Aave DAO’s recent decision to adjust staking fees for its stablecoin, GHO. The move aims to maintain GHO’s peg to the US dollar. If implemented, Aave’s fee switch would follow a similar path taken by Frax Finance, which recently reintroduced its own fee distribution mechanism.

Aave DAO Considers Stricter Rules for Borrowing DAI

However, Aave DAO is also grappling with managing risks associated with specific collateral assets. On April 5, the DAO debated stricter requirements for borrowing against Dai (DAI), a popular stablecoin. 

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Risk management firm Chaos Labs proposed a 12% reduction in Dai’s loan-to-value ratio (LTV), meaning borrowers would need more collateral to borrow the same amount of Dai. This contrasts with Zeller’s initial proposal, which advocated for a steeper 75% reduction. Previously, Aave launched a separate proposal advocating for a 0% LTV for Dai across all its deployments. 

Additionally, the proposal recommended removing incentives for staking a wrapped version of Dai within the Aave ecosystem’s Merit program. These moves can be seen as a response to MakerDAO’s recent “D3M” plan, which rapidly increased the available credit line for Dai borrowing. 

Meanwhile, decentralized exchange Uniswap is on track to implement its fee switch proposal in mid-April. The proposal received positive feedback from the community during a temperature check, paving the way for its official implementation.

On the Flipside

  • The proposal could lead to increased centralization if a small group of whales hold a significant portion of AAVE tokens.
  • Distributing profits to token stakers could disincentivize borrowing on the platform, reducing overall liquidity.

Why This Matters

Aave’s potential implementation of a fee-sharing mechanism for token holders could significantly alter the DeFi landscape by incentivizing long-term token holding and potentially sparking a trend of similar structures across other lending platforms. This shift could have a ripple effect, impacting overall cryptocurrency market behavior by making DeFi participation more attractive.

Dive deeper into the competitive nature of DeFi by learning more about the recent conflict between MakerDAO and Aave here:
MakerDAO’s USDe Bet Puts Growing Strains with Aave in Focus

Looking to learn more about innovative DeFi projects? This article explores Uniswap, Aave, and Algotech:
Navigating DeFi: Uniswap, AAVE, and Algotech Insights

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed as financial, legal, or tax advice. Trading forex, cryptocurrencies, and CFDs pose a considerable risk of loss.

Author
Kyle Calvert

Kyle Calvert is a cryptocurrency news reporter for DailyCoin, specializing in Ripple, stablecoins, as well as price and market analysis news. Before his current role, Kyle worked as a student researcher in the cryptocurrency industry, gaining an understanding of how digital currencies work, their potential uses, and their impact on the economy and society. He completed his Masters and Honors degrees in Blockchain Technology within Esports and Business and Event management within Esports at Staffordshire University.